Question

Pearl Products Limited of Shenzhen, China, manufactures and distributes toys throughout South East Asia. Three cubic centimeters (cc) of solvent H300 are required to manufacture each unit of Supermix, one of the company’s products. The company now is planning raw materials needs for the third quarter, the quarter in which peak sales of Supermix occur. To keep production and sales moving smoothly, the company has the following inventory requirements: The finished goods inventory on hand at the end of each month must equal 4,000 units of Supermix plus 20% of the next month’s sales. The finished goods inventory on June 30 is budgeted to be 14,200 units. The raw materials inventory on hand at the end of each month must equal one-half of the following month’s production needs for raw materials. The raw materials inventory on June 30 is budgeted to be 78,000 cc of solvent H300. The company maintains no work in process inventories. A monthly sales budget for Supermix for the third and fourth quarters of the year follows. Budgeted Unit Sales July 51,000 August 56,000 September 66,000 October 46,000 November 36,000 December 26,000 Required: 1. Prepare a production budget for Supermix for the months July, August, September, and October. 3. Prepare a direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total.

Answer 1

1. Production budget for Supermix for the months July, August, September, and October is:

Pearl products Limited
Production Budget
	Month
Particulars	July	August	Sep	Oct
Sales	51,000	56,000	66,000	46,000
Add: Finished Goods Ending inventory	15,200	17,200	13,200	11,200
Total needs
Less: Beginning Finished goods inventory	14,200	15,200	17,200	13,200
Required production in units	52,000	58,000	62,000	44,000

Working:

Finished Goods
Ending Inventory
July	4,000+20% of 56,000	15,200
August	4,000+20% of 66,000	17,200
September	4,000+20% of 46,000	13,200
October	4,000+20% of 36,000	11,200
Beginning Inventory
July	Given in question	14,200
August	Ending inventory of July	15,200
September	Ending inventory of August	17,200
October	Ending inventory of September	13,200

3. Direct materials budget showing the quantity of solvent H300 to be purchased for July, August, and September, and for the quarter in total is:

Pearl products Limited
Direct Material Budget
	July	August	September	Third Quarter
Planned production units (a)	52,000	58,000	62,000	172,000
Units of raw material needed per unit of finished goods	3.0	3.0	3.0	3.0
Units of raw material needed to meet production	156,000	174,000	186,000	516,000
Budgeted ending Direct Material (d)	87,000	93,000	66,000	246,000
Total units of raw material needed	243,000	267,000	252,000	762,000
Beginning Direct Material (e )	78,000	87,000	93,000	66,000
Units of raw material to be purchased	165,000	180,000	159,000	696,000

Raw material
Ending Inventory
July	1/2 of 174,000	87,000
August	1/2 of 186,000	93,000
September	1/2 of 132,000	66,000
Beginning Inventory
July	Given in question	78,000
August	Ending inventory of July	87,000
September	Ending inventory of August	93,000